Thanks to a tenacious few, equity intrastate crowdfunding is now legal in Florida.
An attempt to regulate the popular concept in Florida for raising money to fund a project or business venture hit a wall last year when the Office of Financial Regulation raised concerns about consumer protection.
This year, the group worked out the kinks by requiring more financial disclosure about the investment, particularly the risk involved; and thus, House Bill 275 proposed by State Rep. David Santiago, R-Deltona, was passed. The Senate also passed the bill and Governor Rick Scott, signed it into effect October 1.
“I’m excited about the intrastate bill getting passed as it allows entrepreneurs to raise money from their most likely source—their customers and neighbors—instead of having to chase a small handful of professional investors,” said Sally Outlaw, President of the Florida Crowdfunding Association. “At the same time it opens up local investment opportunities for community members to own a piece of businesses with which they are familiar.”
While there are undeniable benefits generated by this new way to conduct business, particularly for those who could not access the traditional high net worth investors, some experts caution there also is some risk involved, so it may not be advisable for everyone.
Equity Crowdfunding Explained
Daniel Whitehouse, an information technology attorney with Whitehouse & Cooper, PLLC, explains crowdfunding as a way to raise money for a project or company from a larger number of people, typically through Internet platforms called intermediaries. Not all crowdfunding intermediaries are equity based—only those for investments. The new law only applies to those.
The Florida Intrastate Crowdfunding Law expands capital opportunities for small businesses and allows Florida residents the opportunity to invest in emerging companies within the state, according to Whitehouse.
“This legislation fosters entrepreneurial innovation in our state,” he said.
The process is simple, according to Mathew Armstrong, a capital markets attorney with Broad and Cassel.
“Put together a short form description of your offering, your business, what you want to do with investor money,” Armstrong said. “File it with the state; then register your offering with an online portal or intermediary.”
Prospective investors can log onto these websites, view the company and all its disclosure documents and then decide whether they want to invest.
Effect on Lake
According to Whitehouse, companies with an attractive business model will excel and bring capital from around the state to Lake County. Businesses will have a means to reach interested investors statewide, a task that historically has been impractical (if not impossible). Whitehouse advised that current business owners should consider whether bringing on investors is the right approach for the business and whether it’s at the right stage to support investors.
“Adding investors adds more than just capital to the business—it adds work for the current owners, as well as potential legal ramifications,” Whitehouse warned.
There are other risks to consider, such as damage to reputation if the campaign fails to reach the stated objectives, donor exhaustion and the public’s fear of a scam. According to Armstrong, the law does provide a fair amount of protection by requiring disclosure of the business plan and how the funds will be used.
Whitehouse contends that owners need to understand the fiduciary duties and obligations owed to the new investors and shareholders. To investors, the most important obligation is for the business to maximize profit and provide a return on their investment.
“I fear that some owners may view crowdfunding as a way to pay their salaries,” he said. “When in fact, the crowdfunding investment is intended to grow the business’ ability to generate revenue.”
Whitehouse encourages potential investors to speak with their legal counsel about the pros and cons of crowdfunding before jumping in.